In the episode, Harbucks (a reference to Starbucks), plans to enter the South Park coffee market, posing a threat to the local coffee business owners, the Tweak Parents. Mr. Tweak, scheming to use the boys’ school report as a platform to fight Harbucks, convinces the boys to deliver their school report on the supposed threat corporatism poses to small businesses, moving the South Park community to take action against Harbucks.

"Gnomes" satirizes the common complaint that large corporations lack consciences and drive seemingly wholesome smaller independent companies out of business. Paul Cantor described the episode as "the most fully developed defense of capitalism" ever produced by the show, due to various themes in the episode. In the episode smaller businesses are portrayed as being at least as greedy as their corporate counterparts, while their products are of lower quality compared to the products offered by large corporations.

Mr. Garrison's job is on the line because he does not teach anything relevant, so in an effort to save his job he makes the class do oral presentations on a current event for the town committee. Stan, Kyle, Cartman and Kenny are grouped together with Tweek, a jittery child, who suggests that the presentation should be on the "Underpants Gnomes" who are tiny gnomes that sneak into his house and steal his underpants. The boys agree to stay at Tweek's house to work on Mr. Garrison's homework assignment and to see if Underpants Gnomes exist.

Tweek's parents, who own a coffee shop, give the boys coffee to help them stay up. The boys drink too much coffee, and end up wired, bouncing off the walls of Tweek's bedroom rather than writing their report. As 3:30 a.m., the time Tweek said the gnomes come, approaches, the boys realize they have nothing to present. Tweek's father then enters the room, offering the boys a propagandist speech against Harbucks, a national chain of coffee houses that was recently threatening his business. As he does this, Tweek's gnomes steal the underpants from his dresser, but only Tweek sees them.

The boys' presentation is a hit, much to Mr. Garrison's surprise since he suspects the boys made up the assignment. The town committee is so impressed that they lobby Mayor McDaniels to pass a law against Harbucks. The mayor agrees to a so-called prop 10, allowing the townspeople to vote on whether the Harbucks may remain in South Park. Mr. Tweek's plan worked, but Mrs. Tweek is unhappy, claiming that the boys are being exploited.

The mayor tells the boys to do another presentation just before the vote. Mr. Garrison, knowing that the boys did not write the first presentation, piles the pressure on, telling them that it must be good. The boys, however, know nothing on the subject. As they are at their wits' end, they finally see Tweek's gnomes and ply them for information. At the gnomes' lair, the gnomes claim to be business experts and explain their business plan:

Gnomes' three-phase business plan

Collect Underpants

?

Profit

Kenny is crushed by a falling trolley cart used by the gnomes during the visit; the gnomes are aghast at the accident, but the boys are too fixated on their business research to express their customary outrage at Kenny's latest death.

When the boys come up to give their presentation for the vote, they do a report that is completely different from their previous piece. They now say, having spoken to the gnomes, that corporations are good, and are only big because of their great contributions to the world, such as Harbucks with their great coffee. While speaking, they admit that they did not write the previous paper, which causes Mr. Garrison to be carried away as he lashes out at the boys that they have ruined his life once again. Mrs. Tweek applauds their honesty and admits to the same facts herself. Then she convinces the whole town to try Harbucks Coffee, which is famous because it tastes so good. When everybody does try it, they all agree (especially because the Tweek brand is awful), including Mr. Tweek, who accepts an offer to run the Harbucks shop instead of, jokingly, selling Tweak into slavery. Meanwhile, the gnomes continue to steal underpants from the oblivious townspeople.

Contrary to the anti-corporate propaganda normally coming out of Hollywood, South Park argues that, in the absence of government intervention, corporations get where they are by serving the public, not by exploiting it.

The episode satirizes the common complaint that large corporations lack scruples and drive seemingly wholesome smaller independent companies out of business. Paul Cantor, a literary critic and economic theorist, who has taught college courses revolving around the "Gnomes" episode, has described it as "the most fully developed defense of capitalism" ever produced by the show.[6] Cantor said the episode challenges the stereotype that small businesses are public servants who truly care about their customers by portraying local business owner Mr. Tweek as greedier and having fewer scruples than that of the corporation he is challenging; Tweek knowingly takes advantage of American distrust for big businesses and nostalgia for simpler times in his fight to maintain his bottom line.[7][8] At the end of the episode, Kyle and Stan conclude big corporations are good due to the services they provide people, and uphold the notion that the businesses providing the best product deserve to succeed in the marketplace and grow to become larger.[5][9] However, in portraying the Harbucks business plan as seducing the youth of the town with high-caffeine and high-sugar "kid-dycinno" drinks, Harbucks is also portrayed as lacking scruples in its corporate expansionist agenda.[7]

The gnome characters and their underpants collection represent the ordinary business activity of capitalism that takes place on a regular basis in front of everyone, but is seldom noticed by society.[9] Cantor has said the fact that the gnomes themselves do not understand their own business plan or why they steal the underwear could represent the idea that businessmen themselves often lack the economic knowledge needed to explain their activity and profits to the public.[9] Pop culture scholars Carl Rhodes and Robert Westwood said the gnomes, by forgoing Mr. Tweek's notions of high-mindedness and openly acknowledging their quest of profits, engage in a "pure, 'libertarian' capitalism - one in which profit is the only animus and in which if that is the end, any means are justified."[7]

Following the episode's release, the underpants gnomes and particularly the business plan lacking a second stage between "Collect underpants" and "Profit", became widely used by many journalists and business critics as a metaphor for failed, internet bubble-era business plans[10][11][12] and ill-planned political goals.[13][14][15] Cantor said "no episode of South Park I have taught has raised as much raw passion, indignation, and hostility among students as 'Gnomes' has. I’m not sure why, but I think it has something to do with the defensiveness of elitists confronted with their own elitism."[5] In January 2013, when it was announced that Parker and Stone were opening a new production studio, Important Studios, both the pair and their investors were jokingly compared to the gnomes included in "Gnomes".[16][17]

The Harbucks company is a reference to Starbucks, one of the largest coffee house chain companies in the world.[7]

Gnomes are often associated with the world of finance. Several commentators suggested the gnomes in South Park could be a reference to the phrase Gnomes of Zürich, a disparaging term for Swiss bankers.[7]